FSLR – First Solar Soars 45% Tuesday! Highlighting One of Our “Coming Out of the Blue” Investment Strategy Names.

I have blogged on 4 separate occasions on First Solar over the last year.  For my regular readers this is old news however for new and future readers I will recap my blogs, with relevant model price charts, to illustrate the effectiveness of stocks transiting both positively and negatively one of our Economic Book Value (EBV) lines we label EBV-3.

The first blog was on April 12, 2012, here.  I highlighted through a blog post FSLR having a negative transit of EBV-3.  We call this negative transit pejoratively “Going into the Blue”.  EBV-3 is our last EBV line in our spectrum of EBV lines and when there is a negative transit by any stock of this EBV line this tells you the market – through the stock price – doesn’t believe the stated asset values on the company’s balance sheet (among other possibilities but this is the main reason).  This real time mark to market indicator gives investors a strong signal to sell their investment in the company.

Here is the model price chart at the time contained in my April 12, 2012 blog.

First Solar with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Since this blog, FSLR subsequently traded down to the $11 level in June of 2012.

In my second and third blog, I highlighted FSLR “Coming out of the Blue”.  This is an investment strategy – specific to Model Price – where a company’s stock price transits positively above EBV-3.  We pejoratively call this “Coming out of the Blue” and we color our EBV-3 line blue for this very reason.  More specifically in my November 28^th, 2012 blog I authored the title “First Solar – Coming out of the Blue! Stalking The Big Game (Returns)”.

Was I too obvious with my title!

Here is the model price chart from this November 28, 2012 blog.

First Solar with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

Specifically I wrote;

As I have written many times in this blog[roll] about investment situations where the equity price of any security, I fish in the large cap pond, transits above EBV-3.  I call this “Coming out of the Blue”.  “Coming out of the Blue” investment strategy is a very profitable one for those investors, traders who invest when an equity positively transits above EBV-3.  Would I place my whole portfolio into this one situation?  No!  I would diversify in names, industries and even countries.  I can only say from experience the one company you least expect will probably yield you the most profit, often times that’s the nature of investing.  In other words it’s healthy to have a bunch of companies, as many as possible, breaking above EBV-3 and you will never know which will be the most profitable.

I revisit FSLR again on February 19^th, 2013 with a blog titled “How Jumbo Gains are Possible Using Model Price – Part 2”.   I noted in the blog at that time even though FSLR had a positive transit of EBV-2 in the first week of January of 2013, the stock subsequently traded down but not through EBV-3.  I commented at the time, “Sometimes it’s important to give these names some room to maneuver but also sell when the position transits down through EBV-3.”

Current model price chart, including the big price gain on Tuesday, April 9, 2013.

First Solar Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of FSLR subsequent to this post will be maintained on Facebook, here.

Conclusion

If history is any guide – my history over the last 15 years with model price math – I will be updating FSLR additional times in the future hopefully highlighting substantial gains (no specific prediction on FSLR, just going with the percentages of “Coming out of the Blue” companies making the positive transition of our EBV-3 line.)  I would also like to note that patience is required with these individual stock plays.  They need room to “run” if you will, just as long as these companies stay above EBV-3.  If these same companies have a negative transit of EBV-3, you guessed it; this company would be “Going into the Blue” and should be sold.

P.S. Also see my blog Q&A about “Coming out of the Blue”

FSLR – First Solar Falling into the Blue!

We tweeted yesterday, a warning to investors of First Solar (FSLR) that FSLR had fallen below EBV-3.  This is significant because the market is communicating (Yes, the market is talking to you) there is something wrong with the balance sheet of FSLR or is it something more serious?

First, let’s look at the chart.

First Solar with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of FSLR subsequent to this post will be maintained on Facebook, here.

Here are 4 reasons why stocks may fall below EBV-3.  Which we call “falling into the blue”.

1. If the company is an operating business with a big amount of goodwill on the balance sheet. (Goodwill (excess purchase price over FMV of physical assets) is recorded usually after one or more acquisitions performed by the company).  The market is telling the investor that the “good” goodwill on the company’s balance sheet has turned to “bad” goodwill.  Usually this “bad’ goodwill will be written off in a subsequent quarter or year-end.
2. If the company in question is a financial, the recorded assets are NOT worth what is stated on the balance sheet.  Market value is worth less than book value.  If the financial is big, say a money center bank, write offs usually do not occur.
3. If the company has little or no goodwill, the market is saying the company’s whole is worth less than the sum of its’ parts.  (This is rare).  Also the company’s business model might be in peril.  Don’t see this much in public companies unless it’s a “concept” company with only one line of business.
4. The company maybe insolvent.  Model Price ™ has a solvency ratio calculation that we use (see “Key Concepts” tab above).  We identify 3 forms of insolvency.  If the security has any form of insolvency, this warning sign (trading below EBV-3) will likely mean the equity price will go to zero unless the company can recapitalize in a timely fashion.

So let’s look at this list, point by point, to see if any of these points is applicable to FSLR.

1. Reviewing the financial statements, FSLR took a Goodwill impairment charge during 2011 of $393 million dollars.  The company stills has $65 million dollars in recorded Goodwill on the balance sheet.  Even if the company reduced this amount to zero, it wouldn’t be material to the company, and not a reason for the company to fall into the “blue”.
2. FSLR is not a financial so point 2 does not apply.
3. Reviewing the 10K we found these comments
   “The solar industry experienced a challenging environment in 2011. The year was categorized by intense pricing competition, bankruptcies of several solar companies, many solar companies with little or no operating income, and toward the end of the year, announcements of manufacturing shut-downs or slow-downs. At December 31, 2011, the global PV industry consisted of more than 150 manufacturers of solar modules and cells. In the aggregate, these manufactuers have installed production capacity that significantly exceeded global demand in 2011. As a result, industry average module pricing declined significantly as competitors reduced prices to sell-through inventories in Europe and elsewhere. We believe this structural imbalance between supply and demand (i.e., where production capacity significantly exceeds current global demand) may continue for the foreseeable future, and we expect it will continue to put pressure on pricing and our results of operations in 2012.”

   Bingo, we think we found the reason for FSLR “falling into the blue”.  The market has not only priced in this structural imbalance but also has determined this imbalance is getting worse.

4. To complete our list above,  FSLR has a Solvency Ratio of 1.96.  This is healthy and in no danger of having solvency issues in the near future.  (See “Key Concepts” tab above)

So what are we saying?

We believe the market must be making a comment on the business itself.  The market is discounting “bad” news ahead for this company.  We will watch with interest what the future holds however the market is talking, are shareholders listening?   Also, once FSLR stock price falls below EBV-3, the company’s stock price will become more volatile.  WHY?  The company’s stock no longer has the structure of the EBV lines.  EBV-3 is our last line.

What would change our minds?

If and perhaps when FSLR transits above EBV-3.  A transit above EBV-3, you guessed it, would be “Coming out of the Blue”!